Oil rally fizzles amid lack of supply threat in Middle East tensions

New York — Oil futures pulled back from recent highs Tuesday as markets searched for next direction amid tense US-Iran relations.

ICE March Brent settled down 64 cents at $68.27/b, and NYMEX February WTI was 57 cents lower at $62.70/b at market close.

The lack of immediate supply threat stemming from heightened Middle East tensions has prompted the market to give back some of the risk premium that has built up in recent session.

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Oil futures have steadily climbed since late last week—with Brent briefly trading above $70/b Monday—following the killing of Iranian General Qassem Soleimani by a US air strike Thursday. Iran has promised to retaliate against the US, or its interests, in response to the attack.

But these risks have appeared to lessen. Tehran has yet to make specific threats against energy infrastructure in the region, and on Tuesday Iranian foreign minister Javad Zarif made a peace overture to Gulf countries, lamenting the lack of intra-regional dialog.

Separately, Saudi Arabia reiterated the need for security and stability in the region and the importance of the international community's role to undertake the necessary measures to guarantee both, the country's media minister Turki al-Shabanah said in a statement to the state-run news agency SPA following a cabinet meeting.

Khalid bin Salman, Saudi Arabia vice minister for defense, met Tuesday with US President Donald Trump in Washington to discuss, among other things, oil prices and regional stability.

OPEC officials told S&P Global Platts on Monday that the bloc is prepared to respond to any supply emergency by reversing its production cuts if necessary, further calming markets wary of a potential conflict-related supply disruption.

According to S&P Global Platts Analytics, without new and significant news on a prolonged supply disruption or news to bolster the risk premium, be it from the US-Iran standoff or elsewhere, for instance, from Iraq or Libya, fundamentals point to lower prices in the coming months and further risk premium may be exhausted.

NYMEX February ULSD settled Tuesday 15 points lower at $2.0324/gal, and February RBOB was down 3.22 cents at $1.7222/gal.

Despite the lower settle, tense US-Iran relations continued to hold a floor under prices. Front-month Brent and WTI were still up about 2.5% and 3% from the session prior to the US strike on Soleimani.

The US Maritime Administration on Tuesday issued an advisory warning of the possibility of Iranian attacks on US ships in Middle Eastern waters. Tanker freight rates have hit three-month highs for vessels using the 21-mile-wide Strait of Hormuz separating Iran from the Arabia Peninsula.

The decline in RBOB prices narrowed gasoline cracks to test three-month lows. Second-month NYMEX RBOB vs front-month Brent, a proxy for US Atlantic Coast gasoline cracks, narrowed Tuesday about 70 cents to $4.53/b.